The plan to sell off a majority shareholding in Nats will come under renewed attack on Wednesday when it is included in the Queen's Speech at the start of the new session of Parliament.
But in the face of mounting opposition from Labour MPs and trade unions, ministers now favour a separate Bill on Nats, which would mean dropping the planned sell-off from a wide-ranging transport Bill.
Senior government sources confirmed the move would make it easier to ditch the Nats Bill if it encountered massive opposition from Labour MPs. Their fears have been increased by the concern over safety on the railways after last month's Paddington crash.
A total of 130 Labour MPs, led by former transport minister Gavin Strang, have signed a Commons motion opposing the planned sale. One leading rebel said: "There are real signs that the Government is ready to drop it, if necessary."
The rebels have been waging a behind-the-scenes battle against the plan, warning ministers they could be blamed for any air accidents in the future.
The Tories support privatisation but are likely to seek to exploit the Government's difficulties, if it faces a large backbench revolt. There is also likely to be resistance in the Lords.
John Prescott, the Secretary of State for the Environment, Transport and the Regions, is planning a wide-ranging transport Bill and is anxious to avoid it being delayed. Backbench rebels have been told he will hive off Nats into a separate Bill to avoid that threat, a move confirmed by senior government sources. But allies of the Deputy Prime Minister strongly denied any final decision had been reached.
Gwyneth Dunwoody, Labour chairman of the Commons Select Committee on Transport and a leading critic of the sell-off, said yesterday the Government was now showing a "commendable degree of flexibility" which was "very encouraging." She said: "This is a highly important subject, one that concerns the public."
Union leaders representing the air traffic control staff left a meeting with Mr Prescott on Thursday convinced there had been movement. "There was change in tone. This time, we think the Government is listening," said a spokesman for the Institution of Professionals, Managers and Specialists (IPMS). It is urging Mr Prescott to keep Nats in public control, make it an independent publicly owned company, or vest its assets in a trust.
Mr Prescott has announced plans to keep 49 per cent of Nats shares in public ownership, and to sell 46 per cent, with five per cent allocated to the workforce. Responsibility for safety is to be kept under public control.
Graham Clarkson, chairman of the air traffic controllers' IPMS branch, said: "The system is safe at the moment, and we want to keep it safe."